Factors such as inflation, supply chain challenges, and worker shortages have contributed to a cloudy stock market outlook. Even the largest companies in the world have experienced road bumps brought on by the COVID-19 pandemic.
Amazon's (AMZN 0.64%) 2021 results illustrated that the company is poised for a strong post-COVID rebound despite the lack of movement in its stock price. The company's empire is expanding well beyond its flagship e-commerce business. In some ways, given the number of different industries the company operates, owning Amazon stock could seem like owning an index fund.
Let's dive in and analyze Amazon's 2021 results and learn how the company is building a strong foundation for success on the road ahead and could be a great long-term investment in 2022.
When in doubt, zoom out
For calendar 2021, Amazon's e-commerce business generated $407.6 billion in revenue, representing 20% year-over-year growth. The growth was evenly split between its North American and international segments. Despite the healthy top-line growth, both of these segments reported lower operating margins year over year. North America's operating margin was 3% in 2021, representing a 1% decline from 2020. The international segment declined even further as this business line reported an operating loss margin of negative 1% in 2021 compared to a positive 1% in the year prior.
The decline in operating profits was driven by costs rising faster than revenue. The increased costs were primarily driven by labor supply shortages and inflationary pressures. Amazon's CEO, Andy Jassy, acknowledged these issues during the earnings call and stated, "Despite these short-term challenges, we continue to feel optimistic and excited about the business as we emerge from the pandemic."
It is key to note that management believes that the pandemic-driven challenges will subside, and in the long term, the company is making the right decisions to grow the business.
The hidden gem in the cloud
Although Amazon's e-commerce business comprises the majority of its revenue base, its cloud business is quickly becoming its fastest-growing and most profitable. Amazon Web Services (AWS) generated $62.2 billion of revenue in 2021, representing a 37% year-over-year increase. AWS generated $17.8 billion of revenue in the final quarter of calendar 2021 alone, putting it on a run-rate of over $70 billion in revenue. It is very much within reach that cloud computing will be Amazon's next $100 billion revenue stream.
Perhaps even more encouraging than the robust revenue growth is where the growth comes from. It is not uncommon for companies to allocate large portions of budget spend to sales and marketing in an effort to fuel growth. Some highlights for Amazon Web Services' activity in 2021 include signing and expanding marquee customers such as Rivian, Meta, Under Armour, Goldman Sachs, Pfizer, and Nasdaq. Amazon has proven that its cloud business can acquire new customers and expand its existing base simultaneously, resulting in very healthy margins. Amazon Web Services generated $18.5 billion of operating profit during 2021, representing 37% year-over-year growth.
Although the e-commerce business is operating near break-even levels, the profits from Amazon Web Services have more than offset other short-term losses. They have allowed Amazon to reinvest back into the business. The company is wasting no time expanding beyond retail and the cloud and now has its eyes on the entertainment industry.
The path to building a moat
On the surface, it may appear that Amazon is a business in decline. The company's trailing-12-month operating cash flow decreased 30% year over year to $46.3 billion, while free cash flow decreased to an outflow of $9.1 billion for the trailing 12 months ended Dec. 31, 2021, compared with an inflow of $31.0 billion for the trailing 12 months ended Dec. 31, 2020. However, management has acknowledged that the lack of profit margins in the e-commerce business is directly correlated with supply chain and inflation issues, both lingering side effects of the pandemic.
Amazon has not allowed these road bumps to deter its long-term ambitions. The company understands the dynamics of the broader economic environment and believes that investing a dollar today will be worth far more in the future, even if it needs to assume some upfront losses. Investors can see that Amazon is aggressively investing in its business in the form of higher wages, as well as strategic efforts in entertainment, consumer electronics, and more.
In 2021, Amazon announced that it would be acquiring MGM, and the company became the exclusive home of Thursday Night Football as part of a historic 11-year agreement with the NFL. As an investor, it is encouraging to see aggressive, albeit calculated spending. Management guided investors that first-quarter 2022 net sales are expected to be between $112 billion and $117 billion, representing 3% to 8% year-over-year growth, while operating income is expected to be between $3 billion and $6 billion, compared with $8.9 billion in Q1 2021.
Amazon stock has been down roughly 5% over the last 12 months. Moreover, management expects the same challenges from the fourth quarter of 2021 to persist in the early months of 2022. When taking a longer time horizon into account, it becomes more evident that 2022 may be an opportune time to invest in Amazon stock. Despite short-term pressures and the impact on cash generation, the company has done a stellar job branching into new verticals and honing existing business lines. For this reason, Amazon appears well-positioned for a strong comeback in the years ahead. Additionally, very few companies, and especially its FAANG counterparts, present investors with the opportunity to invest in e-commerce, cloud computing, entertainment, consumer electronics, and more.